The Economist - USA (2020-06-27)

58 Finance & economics The EconomistJune 27th 2020

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tional investors buying up property and

the amounts they have allocated to it have

risen since 2010 (see chart 3). A chunk is

channelled through private property

funds, which have raised $1.6trn since

2008, according to Private Equity Real Es-

tate, a publication. All together, institu-

tions hold about $6trn worth of assets pri-

vately, and $5trn through listed vehicles.

Property is typically financed by helpings

of debt, which accounts for just under half

of the market’s value in America.

Investors’ appetite has been met by a

growing supply of assets. Since 2000, busi-

nesses ranging from burger chains to

banks have spun out trillions of dollars of

property they used to own to free up cash,

often leasing it back immediately after di-

vesting. Worldwide, offices and shops ac-

count for 61% of assets, though the share of

commercial housing (ie, student housing

and condominiums) and logistics assets

has been rising.

Shop till you drop

By the start of this year there were signs of

froth. Both offices and industrial proper-

ties (warehouses, chiefly) reached record

prices at the turn of 2020. Retail-property

prices had already peaked in 2018. Rent

growth, however, had started to level off

across most sectors. All this depressed

yields, and returns had started to flag.

Then the pandemic hit. As investors

panicked, stockmarkets tumbled and

property markets froze. Transaction vol-

umes in May were down by about a third in

the West and two-fifths in Asia, according

to Real Capital Analytics, a data firm. The

proportion of offers that fell through be-

fore completion doubled in Europe and

rose sevenfold in America. Indices tracking

listed trusts that invest in commercial

property (dubbed reits) cratered in March.

Part of that might have reflected an indis-

criminate sell-off of shares by investors

rather than an ebbing taste for property.

But benchmarks have recovered only about

half their losses.

Covid-19 jolts investors out of their

complacency in two ways. First, swarms of

tenants have simply stopped paying rent as

the economy has reeled; the extent to

which losses will persist is especially un-

certain. Second, it may speed up long-term

shifts within the sector: from shops, say,

towards warehouses. Some types of prop-

erty could become less bankable.

Start with delinquency. As lockdowns

shuttered shops and businesses, rent col-

lections collapsed. Less than half of all ten-

ants in Britain paid rent on time at the end

of March; a quarter of it was still due seven

weeks later, says Remit Consulting, a re-

search firm. Hotels have been worst hit:

with borders closed and travel restricted,

average occupancy fell from 70% before the

pandemic to a low of 15% in early April. In

America, average revenue per room shrank

by 84%, to $16 per night, in April. Stand-

alone shops and shopping malls have also

suffered. Collection rates have fallen below

50% on both sides of the Atlantic.

Offices have proved sturdier. Firms that

rent out co-working spaces on short-term

leases have suffered. Other tenants, bound

by decades-long leases, have continued to

pay. Still, collection rates range between

57% in Britain and 90% in America. Late or

missed rent payments in the double digits

are hardly normal.

The resulting lost rental income is like-

ly to have passed through to missed mort-

gage payments. Many banks report losses

with a lag and with limited detail, but de-

linquency rates on commercial-mortgage-

backed securities (cmbs)—bundles of

loans sold on capital markets—provide a

barometer. In America this month they ex-

ceeded levels seen during the financial cri-

sis (see chart 4 on next page). A fifth of debt

payments on shopping properties are late;

a quarter of those due on “lodgings”—in-

cluding student housing, vacant since uni-

versities closed—have also been skipped.

As activity resumes, properties are

adapting, at some capital expense. Hotels

are implementing contactless check-in,

automatic doors and new cleaning rou-

tines. Offices are introducing temperature

checks and reducing pinch points at lifts.

Brian Kingston, who runs the property arm

of Brookfield, a private-equity firm, says it

is reorganising mall layouts and car parks

to make kerbside pickup easier.

But fresh outbreaks, or lingering fears

of infection, could throttle the return to

normality. Cash-poor and fearful, compa-

nies may limit business travel. Households

may shun far-flung holidays and perhaps

even shopping trips at home. That is bad

news for hotels, restaurants and shops.

Erin Stafford of dbrsMorningstar, a rating

agency, reckons that, short of a fast recov-

ery, half of America’s independent restau-

rants may go under.

Such effects will be compounded as the

vast support provided by governments is

rolled back. Since March the authorities

have propped up commercial tenants by

paying employees’ wages, topping up busi-

ness cash reserves, legislating against evic-

tion, backstopping banks and reducing

credit constraints. Most measures are set to

expire within months. Coface, a trade-

credit insurer, expects insolvencies to

jump by a third worldwide by 2021. Land-

lords could find that rental income dries up

just as lenders, tolerant thus far, lose pa-

tience. Without progress on a vaccine or a

treatment over the next three to six

months, says Michael Van Konynenburg of

Eastdil Secured, a bank, “we’ll start to see

more enforcement actions”.

Bricks and mortal

Further ahead, covid-19 will also make

some types of commercial property less of

a safe bet than others, by accelerating

trends that were visible even before the co-

ronavirus began to spread. The most obvi-

ous is the rise of online shopping. Since

February the rich world has seen a surge in

e-commerce activity. Many shoppers may

choose to stick with the speed and conve-

nience of click-and-deliver. In 2019 a re-

cord 9,300 bricks-and-mortar stores closed

in America; Coresight Research, a data

firm, says 15,000 could fold this year.

JCPenney, a century-old department-store

chain, went bust last month.

Shopping malls, particularly those in

the sticks, could be in trouble. On top of the

reduced rent caused by shop closures, the

vacating of department stores, which often

act as “anchor” tenants, may give other

stores the right to pay lower rents, or even

to cancel lease agreements, says Aditya

Sanghvi of McKinsey, a consultancy. A

third of America’s 1,100 malls could end up

being demolished. On June 23rd Intu,

which owns shopping centres in Britain,

appointed administrators.

The pandemic’s effect on office space is

less clear. Many workers may find that they

quite like working from their bedrooms or

kitchens. Others say they miss the camara-

derie of the office. Social distancing may

Hot property

Global real-estate funds, internal rate of return*,%

By year fund closed

Source:PitchBook *AtSeptember30th 2019

2

20

15

10

5

0

-5

2007 1715131109

Bottomquartile

Top quartile

Overall

Rentseekers

World,institutionalinvestorswithan

allocationtorealestate

Source:Preqin

3

Public

pension fund

Private

pension fund

Insurance

company

1.51.00.50

Numberof

investors, ’000

December 2010 June 2020

1050

Average

allocation, %